SIMPLE IRA Plans for Small Business Owners and Employees

An Introduction to the Simple IRA Plan

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A SIMPLE IRA is a special type of retirement plan designed for small businesses who want to offer a way for owners and employees to put aside wealth for later in life, while enjoying several significant tax benefits.
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The term "SIMPLE IRA" is actually an acronym for Savings Incentive Match Plan for Employees Individual Retirement Account. It is designed to be more affordable to maintain than other retirement plans. According to the IRS publication on the matter, “Under a Simple IRA plan, employees and employers make contributions to traditional Individual Retirement Arrangements (IRAs) set up for employees (including self-employed individuals), subject to certain limits.” The Simple IRA is ideally suited as a start-up retirement plan for small employers who do not currently sponsor retirement benefits like a 401(k) plan or a 403(b) plan.

The basic idea of a Simple IRA plan is this: the employer establishes an individual Traditional IRA account for each of his or her employees. Both he or she and the employees can then contribute to these accounts, earning tax benefits both at the time of the contribution and by deferring the taxes that would be owed on the profits earned on the assets in the account. The employees are 100% vested immediately into their Simple IRA accounts, meaning that if they leave their job, they can take the money with them.

Requirements to Establish a Simple IRA

For an employer to establish a Simple IRA plan, they typically need to meet three conditions:

Currently have 100 or fewer employers

Complete just one or two forms

There cannot be any other retirement plans currently offered

Advantages of a Simple IRA

The administrative cost of establishing and maintaining a Simple IRA plan are very low relative to the other alternatives

A Simple IRA program is easy to setup, usually requiring only a phone call to a financial institution to get things started.

Employees covered by a Simple IRA can contribute to their individual Simple IRA account through regular payroll deductions. They will receive a tax deduction and the investments in the account can grow tax-deferred until withdrawn at retirement.

The employer who started the Simple IRA program can choose to either match the employee contributions to their individual Simple IRA accounts or they can contribute a fixed percentage of all eligible employees’ pay to each account. Specifically, the employer can choose either to match their employees’ contribution dollar-for-dollar up to 3% of pay or they can choose to contribute a regular, nonelective 2% for each eligible employee. If they choose the latter, that means that even employees that don’t save anything from their own paycheck must receive the 2% deposit into their Simple IRA.

The employer who sponsors a Simple IRA plan generally has no filing requirements with the IRS. The financial institution that handles the investments for the Simple IRA typically does most of the work.

Simple IRA Contribution Limits

For business owners who want to save more for retirement, you may find that the Simple IRA contribution limits are more generous than the other retirement account options. That’s because both the company and the individual can contribute, meaning that even self-employed people get to benefit because they can effectively match their own contribution, giving them the ability to contribute almost double the amount of a plain old Traditional IRA retirement account.

According to the IRS, the Simple IRA contribution limits are as follows:

Employees can contribute $12,500 in 2017. If the employee is 50 years or older, they can make additional “catch-up” contributions of $3,000 for a total of $15,500 if permitted by the plan. Additionally, if an employee participates in any other plan during the year and has elective salary reductions under those plans, the employee can contribute a maximum of $18,000 across all plans.

Employers can contribute either a dollar-for-dollar match up to 3% of pay or a 2% nonelective contribution into the account of each of their employees.

Simple IRA Withdrawals

It is possible to make Simple IRA withdrawals, but there are serious repercussions. First, any Simple IRA withdrawals are included in the account holder’s income and are subject to regular income taxes.

On top of that, there is a special 10% early withdrawal penalty slapped on all Simple IRA withdrawals before the age of 59.5 years old. In addition, if the withdrawals are made within the first two years of participation in the Simple IRA plan, the 10% penalty tax is increased to 25%.